SERVICES sector sentiment further deteriorated in the last quarter as profitability fell at a record rate for consumer-facing companies, according to latest CBI research published today.

Its services sector survey also found that profitability was flat for business services firms, compounding pessimism in the sector.

Levels of business volumes and values remained weak for the sector as a whole, and neither consumer nor business services firms are positive about business expansion over the coming year.

They have also become more concerned about their ability to raise external finance and the cost of doing so.

Consumer services firms, such as hotels, bars and restaurants, cinemas and gyms, endured an even worse quarter than they had feared. Business volumes and values fell at rates not seen since the end of 2001.

At the same time, costs accelerated rapidly and profitability sank at a record rate. Firms selling professional services to businesses, such as lawyers, accountants, architects, IT and recruitment firms saw their volumes and values of business grow in the last three months, but at rates markedly below those of 2007. Average selling prices fell in what is a highly competitive sector and profitability was flat.

Numbers employed by consumer services firms fell for the second quarter running, but this should be short-lived as firms plan modest job increases next quarter.

Job numbers rose in business and professional services firms and are expected to continue doing so, albeit at a slower rate according to the research.

In the sub-sectors, the only consumer services sector to report growth in business volumes over in the past three months was travel services.

However, these firms incurred rapid cost rises and, with limited ability to pass these onto customers, their profitability fell at the fastest rate for five years.

Demand for leisure and personal care services – such as gyms, hairdressers or cinemas – fell markedly in the last quarter, as did spending in hotels, bars and restaurants.

Profitability of hospitality firms fell at a record rate and numbers employed have fallen for two quarters in a row.

Firms transporting goods and post saw volumes and values of business fall faster than they have since just after the survey began in 1998, with profitability the weakest for eight years and numbers employed decreasing fast.

In business and professional services, there was a divide in the performance of the sub-sectors. While the profitability of office and personnel services, management and legal and property firms deteriorated, other sectors such as marketing and telecomms and IT saw their ability to make profits improve.

Services firms such as lawyers, accountants and management consultants saw well below normal volumes and values of business for the second quarter in a row.

These firms’ staff numbers were unchanged after two and a half years of continuing expansion and training expenditure was cut back at the fastest rate for five years.

Meanwhile, marketing firms saw profitability rise at a record rate, with survey high balances for business volumes and values. Expectations in this sector are not as positive, though, with flat volumes and values and large cost increases thought to be on the way, leading to broadly flat selling prices and profits.

In the telecomms and IT sector, aggressive cuts in selling prices were accompanied by fast rises in volumes and values of business. These drove further rapid growth in profitability in a sector where numbers employed continue to grow at a healthy rate.

Ian McCafferty, the CBI’s chief economic adviser said: “Services sector firms are concerned about their business prospects. Consumers are reining in spending on leisure, entertainment and eating out, while professionals offering services such as accountancy, property and law have seen their profits flatten off as costs continue to grow strongly.

“There are some exceptions though. Travel companies reported healthy demand for holidays in the past three months, with people more inclined to take a well-earned break as rising costs put greater demands on household spending.

“Meanwhile, marketing firms are going from strength to strength and the telecomms and IT sector has seen a run of strong profitability growth.”